More and more businesses are using third-party logistics service providers. Building an in-house supply chain is expensive, slow and a learning process riddled with mistakes. On the other hand, outsourcing the supply chain is efficient, quick and adaptable. The benefits of using 3PL are more than just reduced initial capital outflow or getting expertise. With ever-increasing competition, businesses need to focus more and more on their core activity and reduce or divert resources from non-core activities while extracting the best out of them. Managing supply chain is one such activity that can be efficiently outsourced. In fact outsourcing such non-core activity can be strategically beneficial in the long run for a business. Here are a few advantages that a growing business can get from outsourcing its logistics.
Scalability – Building a supply chain requires time and investment. Underutilized supply chain represents locked capital which is bad for a growing business. On the other hand, peak utilization limits the growth that operations can achieve. However, with outsourcing, the supply chain capacity can quickly increased or reduced without much impact on scale. Quick scalability is one of the biggest advantages an outsourced supply chain can offer to a growing business. Third-party providers are geared to scale their operations depending on their client’s requirements. They invest their capital in spare capacity and clients don’t need to make any capital investment. Further, if the scale of operations reduces for a client, the extra capacity is simply sold to another customer with no impact on the first client.
Optimization – Logistics is frequently about optimization of the resources such as packaging, transportation, route and delivery time for most efficient use of resources with minimum time. This planning and coordination requires special skills that are expensive and hard to find. Further using the skilled and costly planners only for one business may not be the cost-efficient. 3PLs bring in planning and optimization as their core skill. They plan for most optimal warehouse locations, delivery modes and routes and club cargo from multiple clients to bring the costs down. High priority deliveries are also clubbed together to bring down their costs (as compared to individual high priority delivery). This degree of optimization is difficult to achieve for a small business without significant investment and dedication of resources, which can burn quite a hole in the pocket, as the company grows.
Constant innovation – Supply chain requires continuous innovation in terms of packaging, equipment, processes and even transportation vehicles. For example, newer material for pallets keeps making them stronger and lighter, new methods of merchandise scanning makes tracking more efficient, more modern robots make stacking and picking of products much faster and more comfortable. Similarly, new transport vehicles (newer trucks) keep reducing the cost of transportation. The problem is that all such innovation requires an upfront investment and business cannot make any new investment until ROI from the previous investment is realized. But with higher utilization, 3PL have faster ROI cycles and can bring in capital-intensive innovation much quicker. Besides logistics being their core business, 3PLs thrive on constant innovation in supply chain to reduce costs and improve service.
Quick movement between supplier – While it is a good idea to maintain long relationships, business realities sometimes require to change the vendors. This need for change could be for many reasons such as better rates, larger scale of operations, wider network spread, or simply a kind of service that is not being offered by current supplier (even today many 3PL suppliers do not offer cold storage chains). As the business grows, the supply chain requirements will also change. The scale of material handling will increase. The variety of products being sold will also increase, and this will need different logistics skills. In house logistics department will need time to change and may even put up resistance to change. Improving the skill set of the whole department is not possible in a matter of few days (or even few weeks). But changing supplier is just a matter of negotiation (apart from identification of-course). The business operations are not vastly disrupted while the change of supplier happens. As is well known, changing or upgrading a department of the business is extremely slow and tiresome process, but changing a vendor is easier.
Lowering of Costs – Development of supply chain needs space, warehouses, packing machines, moving and stacking machines and vehicles (as large as up to trucks and lorries) making them capital intensive investments. Also, logistic operations are equally expensive, if not more. Many times, the supply chain capacity is not fully utilized leading to a high wastage of money. The 3PL absorbs the capital investment and can depreciate the equipment much faster owing to its higher utilization. The capital cycle (for supply chain) is much more efficient for 3PL as compared to in-house supply chain investment. There is no doubt that unless the volumes are huge, 3PL makes a lot more sense regarding costs and investment for any business.
Further, as the product moves through regions, various agencies or external companies come in picture. A product moving across the border will interact with customs, excise, clearance house, export regulators. Businesses need working relationships with all of them for its cargo to move quickly and efficiently through these agencies. Developing and maintaining these relationships needs resources which cost money. As business volumes grow, the interactions with agencies also increase and need more resources. A 3PL maintains these relationships for its customers so that the businesses do not have to it themselves, and they do it more efficiently.
Developing supply chain is a slow and costly process and often requires changes that are expensive. As the business grows, the inefficiencies of the supply chain start to glare out. The growth phase is precisely the time when companies need an efficient supply chain. An outsourced, third party supply chain will not only eliminate the inefficiencies, but it will also bring in innovation to handle the large volumes of growing business, that may provide the edge, that a growing business needs.